November evenings are balmy on Kuwait City's waterfront, and there is a festive atmosphere in Irada Square as crowds gather for another protest rally. Women swathed in black mix with others in jeans while men in dishdashas and red-checked ghutra headdresses sip tea on Persian rugs spread on the spiky grass.

Speakers are hammering home the call to boycott this Saturday's elections because the emir, Sheikh Sabah al-Ahmad Al Sabah, has decreed a change to voting rules that will weaken the opposition. Stewards display spent teargas canisters that were fired to break up an unlicensed protest last month.

Unlike elsewhere in the Middle East and North Africa , Kuwaitis are not seeking to overthrow their regime. Irada (the Arabic name means "will") is tamer than Cairo's Tahrir Square. Violence is very rare.

Yet there is no mistaking the depth of divisions in this small but fabulously wealthy country – and the anxiety about how they will play out. Its ultraconservative Saudi and Emirati neighbours are watching nervously.

"The emir's decree was the straw that broke the camel's back," said Sultan al-Majrubi, a young activist who was injured when special forces broke up October's big demonstration. "The Sabah family need to change from the inside. They are not thinking about the future and their credit with the people is running out."

Kuwait is still the most democratic state in the Gulf. Its "springtime" dates back to 2006, long before the overthrow of the autocrats who ruled Tunisia, Egypt and Libya.

Last November the prime minister, the emir's nephew, was forced to quit in the face of allegations that MPs had been bribed to support the government. Protests then were the largest ever seen in the region. Parliament was dissolved in June.

The opposition is a coalition of youth groups, disgruntled tribes and Islamists. Many sport orange ribbons – a nod to the revolution in distant Ukraine. Social media play a vital role. The Twitter hashtag #KarametWatan ("dignity of the nation") has been used with stunning effect to organise protests and outwit the government.

"If you look at the slogans, the empowerment of the grassroots and the emergence of civil society activism then yes, we are part of the Arab spring," argues political scientist Shafeeq Ghabra. "People want dignity and political participation and equality before the law. But it's not a revolution here."

Kuwaitis suffer neither hunger nor poverty. The country's oil riches have funded for a lavish welfare system since independence in 1960. Its 1.2 million citizens pay no tax but the system is rife with paternalism and wasta (connections or nepotism). Last year the emir gave every citizen 1,000 dinars (£2,210) in grants and free food coupons. "Kuwait is a wealthy society so people have a lot to lose," smiles Jaafar Behbehani, a businessman. "That's why many support the status quo."

In the capital's diwaniyas – informal all-male gatherings held in private homes – the election boycott is being hotly debated. Ostensibly, the emir is modernising the system by reducing the number of votes from four to one.

But his aim seems clear. "They are crafting a new parliament by having it customised for their own needs," complains a twentysomething consultant handing out boycott badges under the palm trees in Irada Square.

Kuwait's hybrid political system, enshrined in its constitution, is famously dysfunctional. Near permanent deadlock between MPs and the emir has stymied development. The capital's iconic water towers dominate the waterfront but no new hospitals have been built for decades and the international airport is a 1960s relic compared with its gleaming counterparts further down the Gulf.

Oil still accounts for 90% of state revenues, and little progress has been made in diversifying the economy, promoting the private sector and reducing state subsidies. Inward investment is sluggish. Underlying this malaise is a lack of trust in the system and resentment at corruption and a lack of accountability from ministers and officials.

Protesters warn that fiddling with the electoral system will not help if root causes are not addressed. "The government blames the national assembly for being an obstacle to development," says engineer Ghazi al-Shammar. "But the problem really is that they want to make it into a one-man show."

For Ghabra the conclusion is clear: "By not listening to the people the government is creating a bigger problem."

Profound social changes lie behind the unrest. Tribes that came from Saudi Arabia in the 1970s have multiplied and tensions grown between them and Kuwait's urban community, descendants of the pearl merchants and traders of old. "We are against corrupt institutions run by some of the sheikhs and businessmen in their own interests," says Mohammed Ruwayhil of the opposition people's bloc. And like elsewhere in the region, over half of the population are under 25, many educated abroad at government expense.

Deference has faded. "We were always told by our fathers that at a diwaniya there was a strict seating pattern," reflects a thoughtful Sabah minister. "The further you were away from the centre the less you were expected to speak. But with Twitter and WhatsApp and all the social media everyone can speak their mind."

Repression is mild by regional standards. State security agents hanging around Irada Square are easily spotted. "People do get slapped around and sometimes put into solitary confinement but there is no torture," says one activist.

Still, official patience is wearing thin. Arrests for the Kuwaiti equivalent of lese-majesty have increased. Musallam al-Barrak, the firebrand opposition leader, was imprisoned for 10 days after issuing an unprecedented public warning to the emir over his election decree – and (falsely) accusing Jordan's King Abdullah, (who is also struggling with demands for political change), of sending in mercenaries to crush protests.

This month there was a reminder of happier times with a dazzling firework extravaganza commemorating 50 years of the Kuwaiti constitution – winning an immediate place in the Guinness Book of Records as the most expensive pyrotechnic display ever mounted. But the mood is turning ugly.

The opposition is "obsolete," and their protests vulgar complains Safaa al-Hashim, a candidate in the third electoral district. In the media, charges of treachery are flying over the boycott and there is a whiff of sectarianism in the air as Shias are accused of standing with the government and the tribes of being backward.

"My views have shifted from left to right," admits a woman business executive. "I am against the way the opposition is behaving. I understand why they are against the one-man-one vote but this country is still being run by a tribal mentality. The law is only enforced selectively."

Liberals and nationalists are quick to lambast the Muslim Brotherhood – known in Kuwait as the Islamic Constitutional Movement – and accuse it of conspiring to create a new caliphate under the orders of the new Egyptian government. But the claims seem wildly exaggerated and western diplomats privately dismiss them. "There is an Islamist presence, but they are very pragmatic," is the assessment of Ghanima al-Oteibi, a secular student leader. "The Kuwaiti government is attacking the Ikhwan (Brotherhood) because they need Gulf support," suggests Saad al-Ajmi, a former minister.

Turnout in Saturday's election will be crucial in determining whether the new parliament enjoys sufficient legitimacy, or whether, in the words of one sceptic, it is just a "Mickey Mouse assembly". Whatever the outcome it is hard to see how the country's underlying tensions can be resolved any time soon. "Kuwait is different but we are not isolated from what is happening around us elsewhere in the Arab world," sighs the businesswoman.

"The Sabah have always ruled by consensus, but now it is breaking down."

Sheikh to visit Britain

Sheikh Sabah al-Ahmad Al Sabah will get a brief respite from troubles at home when he pays a state visit to Britain this week. The 83-year-old emir is being hosted by the Queen at Windsor Castle and will be her guest at a royal banquet, visit the Royal Military Academy at Sandhurst and meet David Cameron and business leaders who are keen to pursue opportunities in the lucrative Kuwaiti market.

Kuwait is the UK's fourth-largest trading partner in the Gulf, with exports worth £1.1bn to the emirate in 2009. Britain is also Kuwait's the emirate's "partner of choice" for delivering much of its £70bn development plan, comprising 1,000 infrastructure projects including a £4.6bn metro system and a new Kuwait International airport terminal designed by Lord Foster. But implementation of the plan is being held up because of the ongoing political crisis.

Britain is popular for the role it played in helping liberate Kuwait from Iraqi occupation in 1991. Its embassy is the oldest continuously-occupied building in the capital and a relic of the days when British "political agents" ruled the Gulf coast all the way to Aden. Two years ago Tony Blair produced a report – Kuwait Vision 2030 – in which he concluded that the country needed to change if it was to fulfil its potential and avoid an "uncertain future". Kuwait was the first client of Tony Blair Associates, set up by the former prime minister to advise on "political and economic trends and governmental reform".